Morningstar | Strong Lakehead Volumes Fuel Enbridge Energy Partners' Earnings Beat
Narrow-moat Enbridge Energy Partners reported third-quarter adjusted EBITDA of $380 million, a decrease of 5% from the year-ago quarter. Decreased performance was a result of the tax disallowance regulation established by the Federal Energy Regulatory Commission. However, adjusted EBITDA was ahead of our expectations and up 6% sequentially owing to a continued strong performance on the Lakehead system. Distributable cash flow also decreased 5% from the year-ago quarter to $184 million for the same factor above. Like adjusted EBITDA, distributable cash flow surpassed our expectations and rose 11% sequentially for the same factors above.Enbridge Energy Partners maintained its quarterly distribution of $0.35 per unit. On an annualized basis, the 2018 distribution represents a 13% return to investors, among the highest of the master limited partnerships we cover.
Enbridge Energy Partners will soon be acquired by Enbridge, Inc., and thus, we are maintaining our $16 fair value estimate, which is based on an estimated conversion rate to Enbridge Inc.’s shares.
As a reminder, Best Idea Enbridge entered into an agreement to acquire the remaining outstanding shares of Enbridge Energy Partners in a deal worth approximately CAD 3.2 billion based on Enbridge’s Sept. 17, 2018, closing price. Under the deal, Enbridge will issue 0.335 shares for each unit of Enbridge Energy Partners, approximating 72 million shares. The increased purchase price represents a 9% increase from the initial proposal in May and a 3% increase to our expectations.
We consider Enbridge a rare triple threat, boasting a wide moat, an attractive 6.5% dividend yield, and a cheap valuation. While the market continues to place too much emphasis on the dividend and overlook the impact that the growth portfolio will have on future cash flows and the balance sheet, the time is right for long-term investors to capitalize on the stock's considerable upside while collecting a steady stream of growing income.
Please refer to our January report, "Best Idea Enbridge Is a Triple Threat," for a deeper dive into Enbridge Inc.
Enbridge Energy Partners owns and operates crude oil and liquid petroleum transportation and storage assets, and natural gas gathering, treating, processing, transportation and marketing assets in the U.S. The company's Liquids segment includes the Lakehead, North Dakota and the Mid-Continent crude oil systems. The company's Lakehead system consists of a series of interstate common carrier crude oil and liquid petroleum pipelines, and storage assets. The company's Natural Gas segment consists of natural gas and natural gas liquids (NGL), rail and liquid marketing services, gathering and transportation pipeline systems, natural gas processing and treating facilities and NGL fractionation facilities.
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